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Canada needs policies that encourage business investment Add to ...

Benjamin Dachis, William Robson and Aaron Jacobs are authors of the C.D. Howe Institute publication A Crisis of Capital: Canadian Workers Need More Tools, Buildings and Equipment.

What’s the bad-news Canadian economic story of 2015? The collapse in oil prices is hammering activity in the West. Even worse is how retrenchment in the oil patch, which had boosted national business investment after the 2008-09 slump, is revealing woefully weak capital spending elsewhere in the country.

In a modern economy, prosperity depends vitally on capital spending by businesses. When Canadian businesses invest in plants and equipment, they equip workers with technology that makes them more productive, and, ultimately, better paid. The bad news is that even outside the oil patch – including in Central Canada, which we need to lead the way in this lower-energy-price environment – investment per worker is anemic and has been lagging competitors abroad for years.

Preliminary figures show that Canadian business investment has fallen sharply in 2015, its first decline since the slump. Calculate investment per worker and compare Canada with the United States, and the news is truly grim. The average American worker enjoyed about $19,100 (Canadian dollars) in new investment by U.S. businesses in 2015. The equivalent figure for the average Canadian worker is $13,200. That means that for every dollar of new investment enjoyed by the average American worker, the average Canadian worker got about 69 cents.

Per-worker investment in Central Canada is shockingly low: $8,100 in Ontario and $7,400 in Quebec. So for every dollar invested in an American worker, an Ontario worker gets just 42 cents. A Quebec worker gets a paltry 39 cents. The numbers in the Maritimes are even worse.

For Canada as a whole, resilience in the face of falling oil prices has to come from dynamism in the regions of the country less dependent on fossil fuels. The impact of lower oil prices on capital spending by businesses is clear. Per-worker investment in Alberta and Saskatchewan likely fell more than 10 per cent in 2015, while per-worker investment in British Columbia and Manitoba, which hit record levels in 2014, also fell sharply.

So far, however, the rebound in the fortunes of Central and Eastern Canada that could help balance the blow is scarcely evident. Per-worker investment in Ontario has never regained its pre-slump levels. Quebec’s performance was better until three years ago, but has skidded since then. Worst of all is New Brunswick, where per-worker investment reached a comparatively lofty $10,800 before the slump, and has now collapsed to $6,500.

How can workers so poorly equipped hope to engage, let alone win, the global competition for well-paying jobs?

Reversing this tailspin in new capital per worker is an urgent task for Canadian governments.

Some things are easy and can be done nationally. The Trans-Pacific Partnership, freer trade with Europe, opening up more internal trade among provinces and other efforts to lower border barriers heighten competitive pressures and opportunities – spurring higher investment and productivity. Ensuring that corporate and personal income taxes are low enough to attract capital and talent would also help.

In several provinces, the beleaguered energy sector is struggling with resource taxes that discourage new investments. Alberta, for example, could replace its current economically distorting regime with smarter levies.

Even at the municipal level, there is much to do. Business property taxes take a massive bite out of new investment. High provincial and municipal business property taxes partly explain why per-worker capital spending is so weak in the Maritimes. In Ontario, the prospect of ever-increasing electricity prices is also turning potential investors away.

Canadians badly need economic policies that will encourage business investment. Workers abroad are getting better equipped. Policy-makers should ensure that Canadian workers have the tools they need to compete and thrive in the years ahead.

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